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Echo Global Logistics (NASDAQ:ECHO)

Q2 2013 Earnings Call

July 25, 2013 5:00 pm ET

Executives

Suzanne Karpick - Vice President of Investor Relations

Douglas R. Waggoner - Chief Executive Officer and Director

David B. Menzel - Chief Financial Officer, Principal Accounting Officer and Secretary

Analysts

John R. Mims - FBR Capital Markets & Co., Research Division

Allison M. Landry - Crédit Suisse AG, Research Division

Jack Atkins - Stephens Inc., Research Division

William J. Greene - Morgan Stanley, Research Division

David P. Campbell - Thompson, Davis & Company

Nathan Brochmann - William Blair & Company L.L.C., Research Division

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Matthew Young - Morningstar Inc., Research Division

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Operator

Thank you for standing by, and welcome to the Echo Global Logistics Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, July 25, 2013. Now it is my pleasure to turn the call over to Suzanne Karpick, Vice President, Investor Relations. Please go ahead.

Suzanne Karpick

Thank you, Charlotte, and thank you for joining us today on our second quarter 2013 earnings call. Hosting the call are Doug Waggoner, Chief Executive Officer; and Dave Menzel, Chief Financial Officer. We have posted presentation slides to our website that accompany management's prepared remarks, and these slides can be accessed in the Investor Relations section of our site, echo.com.

During the course of this call, management will be making forward-looking statements based on our best view of the business as we see it today. Our SEC filings contain additional information about factors that could cause actual results to differ from management's expectations. We will also be discussing certain non-GAAP financial measures. The reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure is contained in the press release and supplemental 8-K filings for the quarter, both of which are posted on our website. With that, I'd like to turn the call over to Doug

Douglas R. Waggoner

Thanks, Suzanne. First, I'd like to thank everyone who came to Chicago on June 10 to attend our third Annual Investor Day. Consistent with past years, we gave our attendees an opportunity to meet many of our people and observe our operations, in addition to providing them with a thorough review of our operating plans and our growth strategy. I think people came away with a better understanding of how our execution and our culture are taking the complicated out of transportation management for small and middle market shippers.

Turning to our results. I'm happy to report another quarter of double-digit revenue growth. We delivered a record $224 million in total revenue in the second quarter, which was 21% ahead of the prior year and a record $3.9 million in non-GAAP net income, which was 3% ahead of the second quarter 2012. Net revenue margins compressed during the second quarter due to the growth of truckload as a larger portion of our mix, normal second quarter seasonality and to LTL compression, resulting from the renewal and extension of 2 large enterprise accounts. This compression is somewhat isolated, and was the result of collaboration and automation objectives achieved within these specific accounts. We're very pleased with the terms of these relationships despite their effect on our net revenue margins.

I'm pleased to report a sequential improvement in our operating leverage. We controlled operating costs and increased operating margin 161 basis points to 16.2% during the quarter. We believe we are poised to see these gains continue as the year progresses. Additionally, we are excited about our continued sales and employee productivity gains. These increases demonstrate that our focus on training, recruiting and operational support is paying off. We're also very pleased to report that our organic growth rate increased sequentially to 9.8%, something that we have indicated in previous calls would occur. If you recall, during the second quarter of 2012, our new sales hires participated in an extended training program that delayed their entry into sales. Having fewer client sales reps growing their books temporarily reduced our organic growth rate. We anticipated renewed acceleration in this metric this year.

Turning to recent acquisitions. The integration of Open Mile is proceeding as planned, and with the Open Mile and Purple Plum teams joining forces in a single Boston office. We expect additional synergies to develop between our people managing temperature controlled business and our Open Mile personnel as these groups now work together at the same location. We have also recently combined 2 of our Southern California operations into a single facility in Long Beach, and our integration of Sharp into our West Coast operation continues to progress as planned.

Broadly speaking, the overall market remains a bit sluggish. In particular, unusually cold weather in the Midwest placed downward pressure on volumes during the second quarter. Despite this, we continued to execute according to plan, and we're excited about our outlook for continued growth in revenue and productivity.

Let's move on to the slides so we can discuss our second quarter results in greater detail. On Page 3 of the supplemental materials, the key metrics and results are as follows. As I mentioned, total revenue increased 21% to $224 million in the second quarter of 2013 from the second quarter of 2012. The increase was driven by growth in both our transactional and enterprise businesses. Net revenue increased 14% to $39.7 million from the second quarter of 2012. This increase was driven by the overall growth of our business. Our net revenue margin was 17.7%, a 109 basis point decrease on a year-over-year basis. This compression was due to a variety of factors, including a shift in mode mix and LTL compression with a couple of our enterprise accounts that renewed and extended during the quarter.

Non-GAAP operating income increased 14.5% sequentially from the first quarter of 2013 and 3.9% year-over-year to $6.4 million from the second quarter of 2012. This was driven by a year-over-year increase in net revenue. Non-GAAP net income increased 3% from the second quarter of 2012 to $3.9 million, and non-GAAP fully diluted EPS was $0.17 in the second quarter of 2013.

So now I'd like to turn the call over to Dave.

David B. Menzel

Thanks, Doug. Please turn to Slide 4, which will summarize revenue by mode of transportation. As you can see, our LTL revenue increased 9.8% year-over-year to $93.5 million, driven by a 12.2% increase in volume and offset by a 2.1% decline in rates. The decline in rates was due to a decrease in average weight per shipment, as well as a decline in the fuel surcharge per shipment.

Truckload revenue increased 25.7% year-over-year to $101.6 million for the quarter, driven by a 25.1% increase in volume, while rates remained flat. Our intermodal revenue increased 139.4% year-over-year to $15.8 million for the quarter. This growth was driven primarily by the acquisition of Sharp Freight in October 2012.

Other revenue increased 3.6% in the second quarter over the same period in 2012, totaling $13.2 million. Other revenue includes small parcel, International and Expedited revenue, and the growth was driven by increases in these modes within our enterprise client base.

Please turn to Slide 5 for a breakdown of revenue by client type. Our transactional revenue increased 22.9% year-over-year, contributing $158 million for the quarter. This increase was due to an increase in the number of transactional salespeople and an increase in their productivity. Our transactional sales force includes client sales, which includes both employees and agents, carrier sales and dedicated operations staff focused on our transactional business. Our sales force totaled 812 at quarter end, increasing 23 people over the same period in the prior year. Embedded within the transactional sales force, there were 347 client reps at the end of Q2 2013 as compared to 275 client sales reps at the end of Q2 2012 or an increase of 72 people. Average transactional revenue per person increased 13.8% on a year-over-year basis. Sequentially, our sales force declined by 35 people, as our new sale hires were slightly less than anticipated in the second quarter. We intend to increase hiring in the back half of the year, with the goal of increasing our client sales headcount by approximately 80 to 100 people on a year-over-year basis by year end.

Our revenue from enterprise clients increased 16.5% year-over-year, contributing $66.1 million in the second quarter of 2013. This increase was primarily due to growth in the number of clients. Once again, our enterprise renewal rate was in the mid-90s at 95%. We renewed and extended over $100 million in annual enterprise revenue during the quarter, which represents 40% of our annual revenue enterprise run rate of over $260 million.

Turning to Slide 6. I'll review our net revenue and net revenue margin. Net revenue increased by 14% year-over-year to $39.7 million in the second quarter. Our net revenue margin was 17.7% in the second quarter, representing a 109 basis point decrease over the same period in 2012. This compression resulted from the mix shift and compression in LTL that Doug highlighted previously. Specifically, our truckload net revenue margins remained essentially flat compared to the same period last year, while truckload revenue grew as a percentage of total revenue by 172 basis points to 45.3% in the quarter. At the same time, our LTL net revenue margin compressed 159 basis points year-over-year, while LTL revenue decreased as a percentage of total revenue by 423 basis points to 41.7%. Mix shift is to be expected, as our truckload and intermodal business grows, and our truckload margins tend to be lowest in our second quarter.

If you turn to Page 7 of the slides, I'll review our operating expenses and operating income. Commission expense was $10 million in the second quarter, increasing 0.4% year-over-year. Commission expense was 25.2% of net revenue, a 339 basis point decrease over Q2 2012 and a 67 basis point decrease sequentially. This sequential decrease is due to a greater percentage of transactional revenue being generated from employees as opposed to agents. SG&A expense was $20.7 million in the quarter -- second quarter of 2013, up 25.1% from the second quarter of 2012. Consistent with prior quarters, this increase is due to the acquisition of Sharp, additional operating support for transactional sales, investments in growing our truckload business and longer training cycle for our people.

Depreciation and amortization expense was $2.6 million in the quarter of 2013, increasing 19.5% year-over-year. The majority of this increase is driven from continued investment in our proprietary technology, the overall growth of our business. Included in this is a net increase of $100,000 in amortization expense, resulting from our acquisition of Sharp or the acquisitions completed over the last year. Our effective income tax rate was 38.1% for the second quarter of 2013 compared to 37.2% in the prior year. As Doug mentioned, non-GAAP net income was $3.9 million for the quarter, an increase of 3% over the second quarter in 2012. Fully diluted non-GAAP EPS was $0.17 for the quarter. Our GAAP EPS was $0.18 for the quarter, as we recognized a $345,000 reduction in our contingent consideration payable obligations.

Slide 8 contains selected cash flow and balance sheet data. In Q2 2013, we generated $4.7 million in positive operating cash flow. This was an increase of 282.9% over the second quarter of 2012, primarily due to timing differences and changes in working capital. Capital expenditures totaled $2.1 million for the quarter, a decrease of 1.3% from the second quarter of 2012. There were no acquisition-related payments made during the quarter; however, we did make $280,000 in payments under contingent obligations related to prior acquisitions. Our contingent obligation to sellers is reflected on our balance sheet at $10.8 million, which is its estimated fair value, and as of June 30, 2013, we had $46.9 million in cash.

Through the first few weeks of July 2013, our revenue was up approximately 24% over the same period in the prior year. Based on the current economic environment and the ramping we are seeing in productivity, we believe we will see continued growth and improved operating leverage in the second half of the year, and believe our operating results will be in line with our previously stated guidance. This assumes our gross margins rebound in the second half of 2013 consistent with 2012.

With that, I'd like to turn it back over to Doug.

Douglas R. Waggoner

Thanks, Dave. For several quarters, we have talked about our expectation for improved profitability as our ongoing investments in our business begin to take hold. In the second quarter, we saw sequential improvement in operating leverage, and we would expect to see improvements on a year-over-year basis in the second half of the year. Operationally, we remain focused on meeting our hiring objectives and managing pricing. I'm very pleased with our growth in inside sales as our training and development programs are enabling our people to be even more successful, which will continue to improve productivity and reduce attrition over the long term.

In addition, our truckload capabilities continue to expand. We've integrated our acquisitions effectively, and our improved operations are evident in an increased growth rate in truckload and sustained margins in the difficult market conditions. Our service offering has expanded with our intermodal acquisitions and our multimodal value proposition has traction in the market today, which is a key reason why we continue to take market share. All of this, combined with our proprietary technology, has enabled us to continue to add enterprise accounts and renew our accounts at a very high rate, which is providing a strong foundation for future growth and profitability. The proof of our success in growing our business is how we are judged in the market by our clients. This year, for the third year in a row, we were named 1 of the top 10 3PLs by the readers of Inbound Logistics. This year, we moved up a spot to #8. And we recognize that we are still a young company known by many for our impressive growth rate, but more important to us is the recognition that we are receiving in the marketplace for our ability to add value to our clients as they strive to improve the management of their supply chains. We're looking forward to a strong half -- second half of 2013. And with that, I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Mims from FBR Capital Markets.

John R. Mims - FBR Capital Markets & Co., Research Division

Let's see, can we start with -- if you look at net revenue margins, obviously, the mix shift, you see some compression there, which was understandable. But can you talk a little bit about what you saw in the quarter and what you've seen so far in July within the different segments, within LTL, within the truckload and intermodal, versus what you saw last year versus expectations? I mean, have margins -- have you seen any directional shift that's more market-driven?

Douglas R. Waggoner

John, I would say -- we'll take it mode by mode. In the truckload, the economy still is just kind of limping along. And although you've got the normal seasonality, we saw a little bit of bump in volumes and tightness in capacity when the weather warmed up. We saw a little bit of tightness here and there when the produce season first hit, and both of those things are -- affected certain particular commodities and shippers. But the market as a whole, I think, has been pretty stable. In LTL, I would say the same thing. Pricing has been pretty stable. We've commented on the reasons we saw some compression, but I think it's a pretty good market.

John R. Mims - FBR Capital Markets & Co., Research Division

Right. On compression, exclusive of rewriting that contract. So anything that you...

Douglas R. Waggoner

The only other thing I would add too is there's probably some curiosity about hours of service, and although that's just been enacted, we've really not seen any impact from that.

John R. Mims - FBR Capital Markets & Co., Research Division

Right, okay. So basically, any little tightness that you've seen is pretty short-lived, and that's true so far in July as well?

Douglas R. Waggoner

Yes.

John R. Mims - FBR Capital Markets & Co., Research Division

Did you -- Dave, I may have missed it. Did you say how many enterprise clients, the actual number you added this year -- or this quarter?

David B. Menzel

We didn't mention it. We added, I believe, 7 new enterprise clients, that brings the total to 217.

John R. Mims - FBR Capital Markets & Co., Research Division

217. And then what's a fair number, I can go back and look at my notes, but just kind of a ballpark of how many you're targeting to add in a given year and what that means from a revenue standpoint.

David B. Menzel

Well, we've always talked about kind of a broad range, 20 to 40. We've tended to add 5 to 10 on a quarterly basis, and that's been a historical trend that's held pretty firm. The actual growth rate is obviously going to depend on the size of the deals that we had. But I would say that, typically, you're looking at $30 million to $40 million in new enterprise business. And then your base of business is going to be more subject to the broader economy, as our clients' shipping patterns change with economic conditions.

John R. Mims - FBR Capital Markets & Co., Research Division

Sure. That's fair. Does that get -- that 2O to 40, obviously, it's a broad range. But does that get any harder the more mature that segment gets or is there just plenty of growth avenues?

David B. Menzel

We think there's plenty of growth avenues. We're targeting small to midsize companies. There's plenty of opportunities for us out there. And based on the track record that we've had, the pipeline and the way we see the market, we think there's tremendous opportunity to continue to execute and grow that piece of the puzzle.

John R. Mims - FBR Capital Markets & Co., Research Division

Okay. Fair enough. And one more for me, and I'll hand it off. On the operating margin line, a little bit better than we were modeling. Obviously, you had mentioned before that this was a big investment quarter, but you'd see the ramp-up in the back half. Is it still safe to assume that incremental margins can jump to the 30% to 40% range by -- it's end of third quarter? Or is there more investment to expect in third quarter? Or how should we think about how you get from here to the full year guidance?

David B. Menzel

Well, we've previously said that we hope that the operating margins would be in the high teens in the back half of the year, approaching 20%, but maybe not quite getting there. To speak to the incremental margins, so much is dependent on what the net revenue margins actually are. And so, I'd hesitate to give the specifics, but I think that's probably in the low-20s or mid-20s to high -- or low-30s to accomplish that objective.

John R. Mims - FBR Capital Markets & Co., Research Division

So on the incremental, it's kind of low 30% so -- but is it possible -- I mean, at this point, based on what you do know, still high teens even on a quarterly basis, breaking 20% is probably pretty difficult for this year? That's more of a 2014?

David B. Menzel

Yes, I would say that's true. That's a fair statement.

Operator

Our next question comes from the line of Allison Landry from Credit Suisse.

Allison M. Landry - Crédit Suisse AG, Research Division

I just wanted to ask a question about LTL, and specifically, you mentioned in your prepared remarks about seeing a decline in weight per shipment. So I was just wondering if that was related to the 2 enterprise customers that you had mentioned shifting around or whether that's sort of a broader trend you're seeing in the LTL business.

Douglas R. Waggoner

I don't really know the answer, Allison. We probably need to study that a little bit. At times in the past, I've noticed that LTL weight per shipment can be a reflection of the macroeconomic environment. But I also know that it can be due to a mix of freight given a set of an accounts, and so I probably need to -- we need to look at that a little closer before we could answer it.

Allison M. Landry - Crédit Suisse AG, Research Division

Okay. And then just a follow-up question in terms of productivity gains and lapping the extended training programs, how do we think about the contribution to operating profit for the next couple of quarters as you've lapped some of these programs?

David B. Menzel

Well, I think that the way to think about it is that -- the easiest way at least to explain it in my mind, is that our G&A expense incrementally grew a little disproportionately while we extended training and added people. And so now that we've got a cycle where we're adding people, but many salespeople are kind of rolling off the salary plan and into a commission plan, we're going to see lower rates of increase in the SG&A as we continue to move forward. And so that's going to be the easiest way to identify kind of where we're going to get the operating leverage from the sales productivity, in terms of just taking a look at our financials. But as our -- the productivity numbers can, in fact, move around quarter-to-quarter, depending on how many people we hire and how many people we add. So it's difficult to kind of pin down what your actual productivity improvements are going to be on a quarterly basis, but we would anticipate continued improvements over the longer period of time.

Operator

Our next question comes from the line of Jack Atkins from Stephens.

Jack Atkins - Stephens Inc., Research Division

Dave, just to go back to the commentary on the second half guidance. Given that there's sort of a material ramp in operating leverage assumed there, could you maybe sort of walk us through just in a little bit more detail about what we should see in the third and fourth quarter. I mean, are you expecting to see a couple hundred basis points, 100 or 200 basis points of operating leverage even in the third quarter? Or just how should we think about the ramp there, I guess, is what I'm trying to get at?

David B. Menzel

Well, I think that as I mentioned earlier, that we should approach the mid-teens. Last quarter or a year ago Q3, we were at 17.4% EBIT as a percentage of net revenue. So you're talking about to show operating leverage will be obviously between 17% and 19% in Q3 and in Q4. That's kind of the order of magnitude, I would say, and it will be dependent to some extent on obviously actual revenue, actual net revenue, delivered in those quarters because we would anticipate that our G&A costs, while they may escalate slightly, will remain relatively flat through the back half of the year.

Jack Atkins - Stephens Inc., Research Division

Okay. So maybe some modest leverage in the third quarter and then accelerating into the fourth, is that the right way to think about it?

David B. Menzel

It is. I would agree.

Jack Atkins - Stephens Inc., Research Division

Okay, okay. And then just kind of step back here for a second and to get you guys to elaborate some more on the productivity metrics on the new folks coming out of the sales force training program. Could you maybe touch on just some additional details about productivity and turnover and comparing that to the prior program, just so we can kind of get an update on how things are tracking there?

Douglas R. Waggoner

Yes, Jack. I think -- we used to have a trend line that we would sort of use as a basis of evaluation for people that were tracking and gaining tenure. And post the new training program, we've tracked the new set of sales people that have gone through and come out of training and gone into sales, and we track their performance with tenure. And you get past the first couple of months in the job, and we're seeing months 5, 6 and 7, productivity that runs about 40%, north of 40% of our traditional trends. So we're very satisfied that, that what was we set out to do, and we're seeing those kind of results.

Jack Atkins - Stephens Inc., Research Division

Okay. That's really encouraging. And then one last question for me and I'll turn it over. Dave, you mentioned in your prepared comments about commissions as a percentage of net revenue declining, and I think you touched on in the slide deck an adjustment in the commission plans. Could you talk about sort of what's going on there and then maybe when that took effect? And should we see sort of that 25% type level as a percent of net revenue for the remainder of the year?

David B. Menzel

Yes, I mean, I think, that I didn't speak to it in a lot of detail because we talked about it last quarter. We made modest adjustments at the end of 2012 to reflect increasing operational support across the business. And so there was a little bit of a downward adjustment that you saw in Q1 and in Q2 on a year-over-year basis. But I think that, generally speaking, the 25%, between 25% and 26% is where we're running right now, that's probably a good number. The actual percentage sometimes can depend on the mix of business and different factors of that quarter.

Operator

Our next question comes from the line of William Greene from Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Just one quick question for you on acquisitions. We've seen some of the peers do acquisitions on the international side and on the last mile side. How do you think about kind of branching out into something beyond the core segments that you're in now?

Douglas R. Waggoner

I think our desire is to stay pretty disciplined and focused on our strategy, which is low-risk tuck-in acquisitions that add to our core. We're looking for geographic presence. We're looking for books of business. We're looking for salespeople, and we're looking for talent, and then also, multimodal capabilities. So we're pretty disciplined. We've got a good pipeline of deals that we're looking at, and I don't see that the strategy will change much from what you've seen in the past.

Operator

And our next question comes from the line of David Campbell from Thompson, Davis & Company.

David P. Campbell - Thompson, Davis & Company

Doug or Dave, you mentioned in the course of your presentation about gross margins in the last 6 months consistent with last year. What do you mean by that?

David B. Menzel

Doug commented -- I'm not sure -- actually --

Douglas R. Waggoner

Say it again?

David P. Campbell - Thompson, Davis & Company

I think it was Dave who talked about it.

Douglas R. Waggoner

Could you just repeat the question, Dave?

David P. Campbell - Thompson, Davis & Company

Yes, you were talking about gross margins improving in the second half of the year consistent with last year, but last year was 19% gross margin.

David B. Menzel

Oh, I got you. Yes, exactly. We had a 20 basis point increase going from Q2 to Q3 last year. And we did have a slight decrease in margins in Q4, but that was due to the acquisition of Sharp, which changed our mode mix. So we tended to have lower net revenue margins in our second quarter, primarily due to compression we see on our truckload business relative to tightening of capacity in the summer months and -- which corresponds a lot to our West Coast business and into some extent, obviously, the produce season. So we have, in fact, seen -- typically seen expansion relative to Q2, I should say, in the back half of the year, but it's adjusted for things like if an acquisition changes our mix.

David P. Campbell - Thompson, Davis & Company

Yes, that will be a heck of an expansion, though, from 17.7% to 18.5%, but I guess...

David B. Menzel

I didn't mean to imply that it would be the exact same amount, but I was implying that there has historically tended to be -- there are 20 basis point, 40 -- some modest expansion from Q2 to Q3. I did not mean to imply that it would be the same quarter-over-quarter in Q3.

David P. Campbell - Thompson, Davis & Company

Okay, I got it. That's fine. And In terms of sales employee and sales agent, did the sales agents, number of sales agents, did they go down like the sales employees or did they stay the same versus the first quarter?

David B. Menzel

They stayed relatively -- let me give you an exact number there, Dave. I think it was we had 250 sales agents at the end of Q2, which is up a little bit from the prior year, partially due to the acquisition of Sharp again. It was pretty consistent sequentially. We had 246 at the end of Q1, so about the same number.

David P. Campbell - Thompson, Davis & Company

So it didn't change in the second quarter?

David B. Menzel

Correct.

David P. Campbell - Thompson, Davis & Company

Okay. And my last question is, Doug or Dave, can you tell us anything about the impact of Open Mile on your operations in terms of percentage of accounts using it and so forth in the second quarter?

Douglas R. Waggoner

With respect to the technology?

David P. Campbell - Thompson, Davis & Company

Yes.

Douglas R. Waggoner

So there are aspects of the technology, components I'll call it, that we've already put into production company-wide. We're using their system as it is in our Boston office. And we're taking components and certain functionality from their system and implementing it into our overall Optimizer platform. So we're putting it to work. We're getting some great use out of it. There are some interesting capabilities that it brings us, some efficiencies operationally, and I'm pleased with the results.

David P. Campbell - Thompson, Davis & Company

So its benefits are largely to come. We haven't seen a lot of it yet in the second quarter.

Douglas R. Waggoner

No, you won't see a lot of it in the second quarter, but it's -- I would say that the benefits that we see in the Open Mile technology pertain to operational efficiency and booking loads. And so some of that comes as we port some of that functionality from their system into ours.

Operator

Our next question comes from the line of Nate Brochmann from William Blair.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

I wanted to do a few follow-ups on a couple of the other issues already kind of discussed. One is, on the net revenue margins, LTL fell below TL this month, which I think is kind of the first time that happened. And I totally absolutely understand the rationale behind that in terms of reviewing a couple of the large LTL accounts. Do you guys think then that's going to be something going forward so we no longer have as much of a mix issue? And I know things can vary, seasonal, whatever, but are we going to kind of dissipate this mix issue kind of going forward? Or do you think those LTL margins kind of jump back? Just if you could talk a little bit about that.

David B. Menzel

Just to clarify, Nate, we didn't say that the LTL margins were "less than the truckload margins." Just that there was some compression in the LTL margin relative to the things we spoke to. So we would anticipate that our margins remain relatively consistent. Of course, it'll will depend on the market, and there's other factors involved, but there's not a material change, so to speak, in the margin profile within our -- that we saw, I should say, in the second quarter.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay, that makes sense. I misunderstood that then. And then in terms of --

Douglas R. Waggoner

LTL margins will always be greater than the truckload margins.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Which should be the case, yes.

Douglas R. Waggoner

Yes.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

So in regarding the productivity increases, and I definitely get that now we seem to be on a sustainable path for that, and it seems that you have enough evidence to really concretely say going forward that those should be sustainable. How does that look in terms of -- given the fact that you got to kind of boost hiring second half of the year, which again probably makes sense as the college grads come out, but how -- will that kind of disrupt some of that impact in terms of the benefits of that productivity over the next couple of quarters in terms of offsetting some of those gains? Or are the gains now sustainable enough that it should be pretty smooth even as you on-board some additional hires?

David B. Menzel

Well, I would hesitate to try to guide that they're going to be smooth. I mean because of the timing of hiring and people getting added, these are obviously just large averages across the entire business. And so, while we feel confident, obviously, that as our sales force matures and as people gain tenure that we're getting meaningful productivity gains, there can still be a little bit of lumpiness associated with changes in headcount across the transactional business. Having said that, we're hopeful to see continued improvements based on the evidence of what we've communicated and how our new reps are doing.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay. That makes sense. And then just finally, can you give us a little bit of an update on Sharp? Obviously, we went through a little bit of customer disruption. Can you talk about kind of how they're rebounding through that and how they're looking at this point?

Douglas R. Waggoner

Yes, I think we mentioned some of these points last quarter, but I'll reiterate them. We saw a reduction at Sharp, one of their larger accounts. We didn't lose the account, but we just had some reduction in the amount of volume of business that we were getting. We've also seen some pretty tough rate competition coming out of Southern California. And so I think those 2 things combined caused Sharp to miss our revenue plan for them. But that being said, I'm encouraged by the sales activities that are going on. We're continuing to work on the integration of the intermodal functionality onto our platform, and once that's completed, it gives our entire sales force the capability of selling intermodal as an option to truckload shippers. And I think it's going to be a huge opportunity for us to have that intermodal capability.

Operator

Our next question comes from the line of David Tamberrino from Stifel.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

I was wondering, do you have the average tenure of your sales employees for the quarter?

David B. Menzel

Actually, I don't have that metric handy. So I'll have to get back to you on average tenure. I don't suspect it's moved tremendously from -- it's been between 15 and 20 months, not as high as 20, not as low as 15, so somewhere in between. I suspect it's still in that same zone, but I don't have that specific metric handy.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. The question was more of a readthrough just for figuring out if there was any increased attrition from the first quarter. Obviously, you had the sequential decrease in transactional headcount. Was any of that from the change in comp structure from the beginning of the year, it just took a while for some of them to jump ship, go somewhere else? Or was it some natural attrition, people going to growth -- more growth areas within the company?

David B. Menzel

Yes, I think it was just -- as we continue to grow, we did, in fact, have a little bit of attrition relative to carrier sales group as we gain -- made productivity gains and implemented some new technology. So we had -- actually, our productivity in terms of loads per day and our sourcing operation has improved pretty dramatically in the quarter. So that's a little bit of a piece of it. And so some of it's just a normal attrition and adjustment. I don't think a significant amount was caused by changes in the comp because we see more and more people with increasing comps, so we feel good about the opportunity ahead there. But it's going to ebb and flow as we continue to move forward and so I think it's just on a quarter-to-quarter basis, it's a tough measurement to really track.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then along those lines, I think I heard you say you're going to add maybe 80 to 100 for the back half of the year, or was that for the full year from kind of the year end number in terms of transactional sales headcount?

David B. Menzel

That's full year from the year end number.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So it's a little bit down from maybe the 100 to 120 number [indiscernible].

David B. Menzel

Maybe a little bit under that at the end of the day.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then do you have the transactional clients for the quarter, that number handy?

David B. Menzel

Yes, I do, actually. It was 17,293.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

That's pretty much flat year-over-year.

David B. Menzel

Correct. It's up sequentially a little bit, but flat year-over-year.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just lastly, while I got you, the ramp in productivity, as we saw, was 8% year-over-year in the first quarter. For transactional headcount, it did increase 14% roughly year-over-year in the second quarter. Are you anticipating continued acceleration in that and staying in double digits? Or is it a high single-digit growth as you saw in the first quarter for 3Q and 4Q as we kind of think about the back half of the year?

David B. Menzel

I think, as we've said, we've been kind of hesitating to forecast that specific number because it's going to be pretty dependent on the number of new hires that we add and the actual headcount. And so hopefully, it will be in the, like you say, the high single digits or low double digits, but again, will be kind of dependent on the headcount that we add.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And, I guess, one more. Truckload net revenue margin, I believe you said it was flat year-over-year. In this softer rate environment, I'm assuming that you are able to kind of offset decreasing top line rates with better procurement, is that correct?

Douglas R. Waggoner

Yes.

Operator

Our next question comes from the line of Matt Young from Morningstar.

Matthew Young - Morningstar Inc., Research Division

Just a quick question on the acquisition front. What you're seeing in terms of opportunities by mode at this point, what's looking kind of the most attractive in terms of whether it be TL, LTL or intermodal? And just maybe comment on what, I want to call it deal multiples at this point and what you're seeing in terms of competition for smaller operations?

Douglas R. Waggoner

I think we pretty much have our eyes on truckload brokers and maybe to a lesser degree LTL brokers for M&A. I feel like our intermodal capabilities right now are where we need them to be in terms of having a drayage network, having rail contracts and some of the intellectual capital that we wanted. So as it pertains to small LTL and truckload brokers, I think there's some heightened level of interest in the space, and there are, whether it's private equity or strategic acquirers. And there's probably some slight upward pressure on multiples, but I don't think that it's anything that you wouldn't expect at this part of the cycle.

Matthew Young - Morningstar Inc., Research Division

Okay, fair enough. So it's a little bit less intermodal and more on the truckload side. That's kind of what I was getting at.

Operator

Our next question comes from the line of Kevin Steinke from Barrington Research.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

I was just wondering how many people have actually completed the extended training now and are out on the floor?

David B. Menzel

Well, it's probably -- I don't have -- I'm going to have to check on the exact number, but I want to say 100 -- actually, I do have the number. It's 165 people.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And that's a mix of client sales reps and operational support?

David B. Menzel

Yes, I think that number might be just client sales reps actually.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. So that's a pretty sizable increase from the first quarter, I guess?

David B. Menzel

Correct. We were probably at -- I think we were around 125 or so at the end of the first quarter.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. Now you talked about some delayed hiring in the first -- or I'm sorry, in the second quarter and that falling into the second half of the year. It doesn't sound like it based on the operating margin expansion that you're expecting this, but does that delayed hiring have any impact on how you see the second half of the year or the third quarter playing out in terms of margin?

David B. Menzel

I don't think it's going to be -- I don't think it'll have a significant impact. I mean, it can have a slight or a modest impact on the expenses, obviously, depending on who we bring in. But we've got a combination of reps rolling off salary and onto commission and then new reps coming in under a salary program. So I don't expect it to be significant, but it could have a modest impact, but it'll depend on how many people we hire and the timing, how many people more.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

All right. And yes, just circling back on the net revenue margin impact of the renewal of the LTL contracts, is it possible to quantify that?

David B. Menzel

Well, across the entire business, I would say that it's probably about 40 basis points of impact. It's actually -- yes, that's about right.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay, so 40 basis points in the quarter?

David B. Menzel

Yes.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

And we should obviously expect that that's something that's going to continue through into the...

David B. Menzel

[indiscernible] as other business grows, et cetera, it's a smaller percentage of the total, but, yes.

Operator

Thank you. And at this time, I'm not showing any further questions. I would now like to turn the call back to management for any closing remarks.

Douglas R. Waggoner

Thank you. I'd like to thank everybody for joining us on this quarter's call. We look forward to seeing you out and about and talking to you next quarter. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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